The COVID-19 pandemic has affected everyone’s lives, and SMSF trustees are no exception.
While the worst of the pandemic is (hopefully) behind us, you may still have difficult questions to ponder as you focus on how best to position your SMSF in 2020-21, as well as meet your fund’s annual regulatory obligations for 2019-20.
If there is anything in this article that you are unsure about, we encourage you to contact an SMSF Specialist to discuss your specific circumstances in more detail.
Meeting new pension requirements
To help manage the economic impact of COVID-19, the Government has reduced the minimum drawdown requirements by half on common pensions, such as account-based pensions and market-linked pensions, for 2019-20 and 2020-21. This also occurred after the GFC in 2008, and you will need to consider and amend your pension strategies for these two financial years.
This includes ensuring that the minimum pension has been paid for this financial year. Where this requirement is not met, SMSFs will be subject to 15% tax on pension investments instead of being tax free.
Where you have been receiving regular pension payments, it’s likely you may have received more than the required minimum payment for this year. Unless you meet contribution eligibility rules, these funds cannot be returned.
It is also important to amend your pension strategies for 2020-21 to reflect the “new” minimum pension standards. Specialist SMSF advice should be sought to help you determine the most effective way to structure benefit payments.
Non-concessional (after-tax) contributions are limited to $100,000 for the 2019 financial year and concessional (before-tax) contributions are limited to $25,000. These will remain the same for 2020-21.
Before 30 June 2020, you should review your contribution strategies to ensure you have contributed what you intended to and ensure you are below the contribution caps. The 2019 financial year is also the first year where you may be eligible, subject to your total super balance, to make larger concessional contributions if you have any unused concessional contribution cap from the 2018 financial year.
Finally, from 1 July 2020, if you are aged between 65 and 66 you will now be able to make voluntary contributions (previously this was restricted to people below 65) without meeting a work test. These older individuals may also be able to make up to three years of non-concessional superannuation contributions under the bring forward rule should further legislation that is slated to pass before the end of the financial year proceed, so it may pay to get advice in order to maximise your contributions.
Investment strategy and property assessment
Your fund’s investment strategy is a key consideration on the cusp of 2020-21.
It is important to understand that an SMSF’s investment objectives and strategy are not set in stone, with the strategy needing to be reviewed at least once a year and signed off by an auditor.
Before any investment decision is implemented, particularly in a COVID-19 environment, you should examine the impact it will have on the overall portfolio to ensure you are investing in line with your strategy.
For those exposed to property, in some cases with a limited recourse borrowing arrangement (LRBA), there are new considerations. Many SMSF commercial properties (and, to a lesser extent, residential property) will not be receiving full rental payments under their lease agreements because of COVID-19, resulting in less income.
All efforts should be focussed on negotiating with tenants and using the Government’s support packages to ensure they will be able to withstand the effects of COVID-19. This includes considering the property relief measures the ATO have implemented and the use of the National Cabinet’s Mandatory Rental Code to plan out rental income for the current and the following financial year.
$1.6 million transfer balance cap and total superannuation balance
A delayed lodgement date of 30 June 2020 is in place for all SMSF trustees as the sector navigates the COVID-19 pandemic. It is important that you, as an SMSF trustee, understand the position of your SMSF at 30 June before taking any actions which could cause you to breach superannuation laws.
The $1.6 million transfer balance cap applies to SMSF members who are receiving a pension. A $1.6 million transfer balance cap limits the amount of tax-free assets that can support a pension.
Ensure you are aware of the consequences of excess transfer balances and avoid exceeding the cap.
Different total superannuation balance thresholds exist for SMSF. Ensure you are across your fund’s total superannuation balance which may be relevant for contributions, exempt pension income or transfer balance account reporting.
SMSF trustees need to be considering all these points in regards to their fund before the end of this financial year, whilst planning ahead for the next financial year. A discussion with an SMSF Specialist is a great starting point if you require assistance in regards to your specific circumstances, enabling you to maximise your fund and not breach any superannuation laws.
Disclaimer: The information contained in this document is provided for educational purposes only, is general in nature and is prepared without taking into account particular objective, financial circumstances, legal and tax issues and needs. The information provided in this article is not a substitute for legal, tax and financial product advice. Before making any decision based on this information, you should assess its relevance to your individual circumstances. While SMSF Association believes that the information provided in this article is accurate, no warranty is given as to its accuracy and persons who rely on this information do so at their own risk. The information provided in this bulletin is not considered financial product advice for the purposes of the Corporations Act 2001.